Sterling jumps to December high vs dollar after BoE raises rates

Sterling jumped on Thursday after the Bank of England hiked interest rates but erased most of its gains against the euro as the European Central Bank reduced its monetary support, while it remained close to its December high against the dollar

The BoE raised its main interest rate to 0.25% as inflation pressures mounted in Britain, becoming the first major central bank in the world to raise borrowing costs since the coronavirus pandemic hit last year

The ECB cut support for the euro zone economy, but promised copious support for 2022, confirming its relaxed view on inflation and indicating that any exit from years of ultra-easy policy would be slow

Sterling was up 0.6% at $1.3344, while it rose 0.25% versus the euro to 84.94 pence

It hit its highest levels since the end of November versus the euro and the dollar respectively, at 84.54 pence and 1.3375

“Having first guided markets into betting on a rate hike in November, the Bank of England today defied market expectations again by finally pulling the trigger,” Berenberg’s economist Holger Schmieding said

“We expect a further 25 basis point hike in February 2022 to take the bank rate to 0.5%,” he said, adding that his forecast for the UK rate at end-2022 was stable at 0.75%

Several analysts had flagged that BoE could allocate more significance to the pandemic at its policy meeting, despite recent robust economic data

Hospitalisation rates are rising in some areas in Britain as the Omicron variant spreads, England’s top health official said on Wednesday, warning that the number of cases would break records in the next few weeks

“The announcement does look like a bit of a panic move – the Bank of England is probably regretting its decision not to move last month when Omicron wasn’t even an issue,” said Chris Beauchamp, chief market analyst at IG Group

Data on Wednesday showed British consumer price inflation leapt by far more than expected and hit a decade-high 5.1% in November

Political risks continue to weigh on sentiment as Prime Minister Boris Johnson faces turmoil in his Conservative Party over measures to curb the COVID-19 outbreak’s spread and a public outcry over alleged office parties at Downing Street during last year’s lockdowns

Voters went to the polls in a region of central England on Thursday to elect a new member of parliament in a test of Boris Johnson’s authority